Question

The sales and earnings for X-company are expected to grow over the next 6 years. Although the firm plans to retain

and reinvest 100 percent of earnings during each of the next 5 years,  X-company expects to begin paying out 60% of earnings during the fiscal year ending in October of 2025, with an initial shareholder dividend of $3.00 per share to be paid in October of 2025 (at date 6). From date 6 on,  X-company is expected to retain a constant fraction of its earning to be reinvested at a constant rate of return on equity. Assuming that X-company's stock is currently trading at a price of $37.26 per share and that the required rate of return for E-Retailing's stock is 10%, determine the rate of return on its new equity investments (ROE) that X-company's shareholders expect the firm to earn from date six onwards.